My Portfolio: June 2012

Quick post:

What I’m thinking at the moment: For the past few months I’d been a bit suspicious of the rising market, and after thinking about it a while I started to suspect that it was a self-reinforcing rise that resulted at least partly from the collective pressure that lots of fund managers feel to get a certain amount of yield per year.  People were looking for good news because they needed something to go up to justify their (managers’) existence.  When I left Treasuries back in February(?) I put my money in a Vanguard money market fund until I could figure out a better place for it.  I didn’t get to participate in the rising market after then, but I also didn’t take on as much risk of a catastrophic loss if some big scary event cause a panic or forced sell-off.  However, in ’08 different MMAs saw losses, so even being in a Vanguard MMA isn’t totally safe.

Re: the global outlook

What I’m thinking at the moment: I’ve been slowly making my way through Reinhart’s “This Time Is Different” as well as a Peterson Institute report called “The Global Debt Outlook Over the Next 25 Years”.  And I’ve also just been reading lots of miscellaneous articles.  The general feeling I’m getting is that there were a lot of bad loans made by banks and pensions in the past few years, and someone is going to have to eat those losses.  Because the problem is so big it seems like governments are going to try to spread the pain as much as possible, and they’ll try to prevent another collapse like Lehman Brothers, so it doesn’t look like the next big shock to the market will come from a bank’s collapse.  Instead it looks like it will come when people try to flee the debt of particular countries.  That seems like it will be the point at which countries will no longer be able to “play pretend” about the reality of the situation.  I still don’t know where money could go to escape; I think the US has the most capital denominated in its currency and so if countries need to inflate away debts then the US may be able to do it in the least disturbing way.

My Portfolio: April 2012

Quick post:

1. I pulled out of Treasuries about a week after my last post, when there was the first inkling of a sell-off.  I hadn’t realized that if bonds are really popular now and become less popular in the future, you’ll lose money if you’re invested in a bond ETF.  I think that’s how that works.

2. I also learned that the borrowing cost of Groupon is so high (~100% of the stock’s value per year) that you can’t just hold it for 5 years and wait for the company to go bankrupt.


At the moment I’m just doing a lot of macro-level reading, trying to figure out what’s going to happen in the market over the next few years.  I’m worried that there’ll be another crash like in ’08 because there’s so much bad debt out there that could knock over a bank and cause another forced sell-off.  I want to learn more about exactly why the ’08 crash happened.

My Portfolio: February 2012

I’ve started making trades in the Investopedia Stock Market Simulator; my user name is Nathan_Wailes, and I’m playing in the “2012 No End” game.  I started with $100,000.

I don’t expect to be successful at first, but I figure I’ll learn more by trying things and making mistakes than by only reading.

Actions taken:

  • Bought ~$90,000 of Treasury ETFs (VGLT, VGSH, TLT) at the market
  • Bought ~$5,000 of the biggest S&P500 ETF (SPY) at the market
  • Sold Short ~$5,000 of Groupon (GRPN) at the market

I’ve moved my money into Treasury ETFs except for a bet that Groupon’s value will diminish relative to the market.  Right now I have it as a spread trade: $5,000 shorting Groupon, and $5,000 long on an S&P500 ETF.  This basically allows my bet to control for the overall level of the market, so if people start putting a ton of money into the stock market and the general level of the market goes up, I should still be able to make money as long as Groupon’s value relative to the rest of the market goes down.  The downside of this style of betting is that your reduced risk comes at the cost of reduced profits, since half of your betting money is being used to control for the general level of the market.

Reasoning for My Actions:

The Treasuries bet:

  • There is a lot of uncertainty now about what is going to happen in the EU and the US because of this huge credit bubble stacked on top of an enormous debt problem.
  • If growth for the next 10 years looks like it’s going to be flat, stock PEs may gradually go down as the consensus on stocks changes (ie over 5-8 years of zero growth people will stop looking at stocks as being worth the PEs they’re currently trading at).
  • I want to avoid another crash like ’08, and some intelligent investors have been saying that the danger to the banks that we’re seeing now is just as much worth worrying about as the danger to banks in ’08.
  • Kyle Bass has said (and I think I’ve heard this elsewhere as well) that investors see Treasuries as being the “high ground” in this disaster: the asset least likely to take massive losses in value if everything goes haywire.
  • Timeline for this bet: I’m going to keep the money in Treasuries until I find other uses for it.  So the money could be there for years if I don’t find any other way to use it.  More likely is that it will be there a few months.

The Groupon bet:

  • I’ve gotten the vibe that Groupon was a money-making scheme for its creator, and that’s not a good omen for its future.
  • The practices I’ve heard them engaging in don’t sound like they can go on for years.
  • At a $12 billion market cap, it’s worth more than Office Depot, Safeway, Suzuki, Sunoco, and Quest Diagnostics (individually, not combined).  It seems very unlikely to me that Groupon is that valuable.
  • Jim Rogers has said that he is short US technology stocks; given his opinion on the Facebook IPO (he recommends against buying Facebook shares), I’d be willing to be Groupon is one of the tech stocks he’s shorting.
  • Timeline for this bet: Based on the fate of many late ’90s internet companies, I would guess that Groupon would lose value within the next 5 years.

Things that could make my decisions turn out to be bad ones:

The Treasuries bet:

  • Interest rates go up – Treasuries could lose value if interest rates go up.  Interest rates will go up if the Fed raises them.  The Fed will raise interest rates to avoid high levels of inflation.  High levels of inflation may arise if the amount of money circulating in the economy starts to rise by a lot.  The amount of money circulating in the economy would rise if lots of everyday people went into more debt.
  • The global outlook gets rosier – I’m not exactly how Treasury ETFs work, but it looks like if demand for equities goes up, and then demand for Treasuries goes down as a result, I could lose money.

Further Questions Regarding this Bet:

  1. How much more money, exactly, would need to start circulating in the economy to cause X, Y, or Z levels of inflation?
  2. How much inflation would need to exist to cause the Fed to raise interest rates?
  3. How much money would need to flow out of Treasuries and into the stock market to cause an X% decrease in the value of my holdings?

The Groupon Bet:

  • Groupon purchases or creates a new, exciting, and/or profitable business – Google has bought and created lots of businesses over the years, and my uneducated guess is that that type of growth has played a big role in its huge valuation.
  • Keeping it as a spread trade isn’t worth it – The reduced risk that I get from having it as a spread may not be worth the reduced return I will get from cutting my bet in half.

Further Questions Regarding this Bet: